Island economy question- improvment in standard of living

Economics Economics Questions
1

Hi,

I am not quite clear about the link between the growth of an economy and the improvement in the standard of living (SOL) of the people. Please help me understand it.

Consider the commonly cited island economy. Person A weaves 10 fishing nets a month. He uses his income to buy his basic necessities. Weaving is his only skill and he can’t weave any faster. The labor input of A is our controlled variable.

Now assume that the island economy is growing rapidly. How would the SOL of A change due to this growth? I can see two possibilities but not sure about them.

  1. The value of A’s labor input increases (he earns more for the same work). But then wouldn’t the economic growth also make A’s basic necessities also equally expensive, and as a result he would be able to buy the same amount of basic necessities as he used to buy before? So no change in A’s SOL.

  2. A’s income doesn’t change, but the economic development drives the cost of A’s basic necessities down. Therefore A is able to buy more than before; has a surplus and can buy other things. Is this a correct assumption?

Thanks,

MG.

2

Economic growth would cause the weaver’s cost of living and cost of production to fall, thereby increasing the weaver’s profits and standard of living.

3

It seems like our weaver may be stuck in somewhat of a subsistence standard of living. If he were to manage to build savings, and use the savings to either build or acquire tooling used to improve the productivity of his net making, then he could see his living standard rise. I realize that is not precisely your question, but the above observation seems appropriate. Also, the decision about whether or not to invest in tooling is based on subjective value scales, time preference, etc.

No, I don’t see this happening. The value of A’s nets is entirely subjective. (You referenced the value of A’s “labor”, but I don’t see how this is relevant. It is the nets that have value, not his labor.) Perhaps the people become more willing to exchange either more goods or exchange an increased variety of goods for A’s nets, but this would be entirely independent of what is happening in the economy. Maybe people have an increased desire for fish, etc. Just as likely, the value of A’s nets could decline or go to zero if subjective value scales change (don’t like fish, find a new way to fish, find better nets, etc), even if the island economy should “grow”.

Perhaps. But it is difficult to envision “A” continuing to make nets by hand and then benefit significantly from everyone else increasing their productivity, which is what is being implied by your reference to “economic development”. His standard of living might be improved if he quit making nets by hand and went to work for someone who has invested in capital equipment, perhaps better using his skills there (division of labor made possible by capital investment). Again, the increase in capital formation is implied by your question, as you are assuming an increase in “economic growth”. There cannot be “economic growth” without capital formation.

4

Which means more things are being produced. Say there are now 1,000 bananas for sale every market day when there used to be 10. The price of banans drops sharply.

A used to buy 1 banana a week. Now he buys 5, and has some money left over for other stuff as well.

5

Dear misicgold:

There are almost no islands in the world that do not have trade with parties outside of their politically controlled borders.

Some entrepreneur will buy the bananas from the grower and then export the bananas to foreigners in exchange for the foreigner’s commodities, gold, silver, and/or sometimes freshly printed currency.

Maybe a Ship Captain will buy the bananas from the grower or the entrepreneur and then sell them at a place that does not have any bananas (for a profit).

I believe that real wealth, jobs, industry, and real monetary value is created and/or acquired ONLY when the members of a family (or a nation, city-state, island, tribe, etc.) plant, grow and/or harvest something of commercial value from the earth, extract something of commercial value from the earth, provide professional services (medical, legal, dental, engineering, architecture, accounting, land surveying, technology, etc.) to others outside of that family, and/or manufactures or constructs something of commercial value that is consumable (or permanently useful for income or rent) and then sells, leases or rents these items and/or services to parties outside of their family, in return for a net transfer of gold, currency or commodities from other parties outside of their family into their own family.

The members of that family can reflect their real wealth and financial security with the accumulation of grain, gold, cattle, jewels, land, buildings, commodities and/or other marketable products for reserve use in times of emergency and/or also to raise the standard of living for the members of that family.

6

So, since no goods/services are being exported to other planets, the wealth of the “Earth Family” is not real?

Z.

7

The separate families, nations, city-states, islands, and tribes of the world do not normally share the fruits of their labors with the global community, nor should they. Each family lives a lifestyle that is maintained by consuming the wealth that is produced by the working wealth producers in that family.

Each family on an island, continent, or the entire world is not obligated to share the fruits of their labors with any other family, tribe, state or nation.

Governments might and usually do pass laws to force the working wealth producers in that family to provide a portion of fruits of their labors to the citizens that are not as fortunate.

Sometimes those unfortunate citizens squandered their previous resources on new cars, fast food, Big Screen TV’s, vacations, booze, cigarettes, etc., instead of educations, businesses, trade schools, etc.

The leaders of the wealth producing family could stop creating wealth and then export all of the gold, products, services, commodities and wealth created by their previous generations as needed to allow the current members of that family to stop working and live a non wealth producing lifestyle maintained by selling title to the privately owned businesses, factories, casinos, hotels, farms, land, ports, breweries, refineries, forests, ports, breweries, refineries, and other privately owned assets located in the USA that were created by previous US generations.

After the previously wealth producing family sold all of their assets, they could print paper bonds that required the children of the previously wealth producing family to work hard and produce wealth to redeem these debt instruments when they become due, and sell these bonds to raise money and gold to pay for imported products to consume rather than making the products that the previously wealth producing family needs for consumption to maintain life.